Utilities dividend stocks – December Purchase #2

After last week’s purchase in the Energy sector, the Utilities sector is the lowest weighted sector in my dividend stock Portfolio this week. The last purchase I made in this sector was buying LNT in September.

Utilities Sector stocks

The Utilities sector consists of companies involved in the distribution of electricity, gas and water supplies. The industry requires a lot of investment in infrastructure – utility companies often have high debt and can be affected by interest rate changes. Price regulations may also impact the ability of utility companies to pass higher energy costs on to their consumers.

Generally speaking however, Utilities forms a slow growth but fairly stable sector of the market, and it has many long term dividend growth companies compared to other sectors. Around 62% of dividend paying utility companies in the US have more than 5 years of continual dividend growth when I surveyed the markets earlier this year, compared to only 25% of dividend paying companies in the Financials sector.

YTD Total Returns for the entire sector this year are 16% which is the second highest of all 11 stock sectors, beaten only by Healthcare at 19%.

Here’s my portfolio as of 08-December, showing the sectors and their current weights. Utilities are the lowest, followed by Healthcare then Communications. At 8.9% of my total portfolio, the Energy sector is my lowest valued sector and outside my current target of 10% +/- 1%.

My dividend stock portfolio as of 08-December-2014 showing Utilities as the lowest weighted sector, followed by Healthcare then Communications.
My dividend stock portfolio as of 08-December-2014 showing Utilities as the lowest weighted sector, followed by Healthcare then Communications.

I’m using my dividend investing rules to guide my selection.

My Utility dividend stocks

I have currently have positions in AWR, GXP, LNT and VPU in the Utilities sector.

American States Water (AWR)

American States Water [AWR] is a $1.3B utility company in California that provides water and wastewater services.

The company is a dividend champion and has increased its dividend annually for the last 60 years. It offers a dividend yield of 2.5%. Its payout ratio is 55% which is in-line with the last three years, and down from the 60-70% levels reached between 2000 and 2010. The annualized dividend growth over the last 5 years is the highest in this round-up at 10.5%.

Its P/E of 22.5 is higher than the industry average of 16.1 and the S&P 500 average of 18.7. Since 2004 AWR’s P/E has always been higher than the S&P 500 except for last year when it dropped below the average of 18.6 with a  value of 17.9. Projected EPS growth over the next 5 years is 2.0%, an increase of 1% since September.

Great Plains Energy (GXP)

Great Plains Energy [GXP] is the holding company of Kansas City Power & Light Company and KCP&L Greater Missouri Operations Company with a market cap of $4B. It provides power to around 830,000 consumers.

The company’s current dividend yield of 3.7% has increased slowly over the last 4 years, with a 5 year dividend growth rate of 2.4%. The payout ratio is 60% which compares well with levels over the last 4 years, and it has a stable dividend schedule with increases coming each November. This year was no exception to that rule and the dividend increased 6.5% to $0.245 per share.

GXP has a P/E of 17.2 vs. the industry average of 21.2 and the S&P of 18.7. For the most part since 2004, its P/E has been lower than the S&P (except for 2006, 2008 and 2011); this year being no exception. Estimated 5 year EPS growth is 5.0%, down 0.2% since September.

Alliant Energy Corp (LNT)

Alliant Energy Corp [LNT] is a $7B Midwest energy company that provides electric and natural gas services to communities throughout Iowa, Wisconsin and Minnesota.

The current dividend yield is 3.2% with a payout ratio of 58%. The payout ratio has been trending down over the last 4 years, with low income raising the P/O ratio to 148% in 2009. LNT’s dividend growth over the last 5 years has been about 6.3%.

The company has a P/E of 18.4 which is less than the Industry average of 21.2 and the S&P’s 18.7. Historically since 2004, the P/E tracks slightly under the S&P except for 2005 and 2009 when it was significantly higher. Projected 5 year EPS growth is 4.9%, up 0.2% since September.

Vanguard Utilities ETF (VPU)

Vanguard Utilities ETF [VPU] is an ETF which I originally bought in January 2013 when I wasn’t sure which utility stocks to buy. It’s low cost (0.14% ER), commission-free and currently yielding around 3.1% in dividends. Its dividend growth has been about 4.9% since 2009 and has increased every year since 2007. The dividends for 2005-2007 were the same. The annualized dividend growth over the last 5 years is 4.9%.

The fund holds 79 utility stocks, the top 10 being Duke Energy, NextEra Energy, Dominion Resources, Southern Co., Exelon Corp, American Electric Power, Sempra Energy, PPL Corp, PG&E Corp and Public Service Enterprise Group. These 10 companies occupy about 50% of total net assets.

Choosing new stocks to consider

I already have 4 stocks in this sector, with 5 being my maximum allotment so I’m not in a hurry to fill the fifth slot. The following companies are all in my watchlist at the moment.

NextEra Energy (NEE)

NextEra (NEE) is a $44B Florida-based clean-energy company which has been named the #1 Most Admired Utility company eight years in a row by Fortune magazine.  NEE owns the Florida Power & Light utility and NextEra Energy Resources, the largest US wind- and solar-energy provider. It has a generation capacity of around 42,500 MW. The company has recently agreed to acquire Hawaiian Electric Industries for $4.3B.

NEE’s quarterly dividend is $0.725 a share, giving it an annual yield of 2.8%. It has increased dividends each year for 20 years, increasing dividends in February. Annualized dividend growth over the last 5 years has been 8.9%. The payout ratio of 66% is little higher than its normal range between 40-65% over the last 10 years.

NEE has a P/E of 23.3 which is higher than both the industry average of 21.2 and the S&P Average of 18.7. Its P/E value has been higher than the S&P for the last 2 years and it has typically been very similar to the S&P average over the last 10 years with exceptions in 2007 (higher) and 2009-2010 (lower). Its projected EPS growth over the next 5 years is 6.6%.

Connecticut Water Service Inc

Connecticut Water Service [CTWS] is a $381M holding company for water utilities in Connecticut.

It’s another long term dividend champion having increased its dividend each year for the last 45 years. Its dividend yield is 3% with a payout ratio of 54%. The current payout ratio is a great improvement from the high of 81% reached in 2010, and the value has been steadily decreasing for the last 4 years. The annualized dividend growth over the last 5 years is quite low at 2.3%.

The P/E ratio of 18.2 is above the industry average of 16.1 but below the S&P’s 18.7. This year marks the first year (starting from 2004) where CTWS’ P/E value is lower than the S&P average. Estimated EPS growth over the next 5 years is 5%.

American Water Works

America Water Works (AWK) provides water services to residential, commercial and industrial customers n the US and Canada. It’s a $9.3B company, organized into two reporting segments; Regulated Businesses and Market-Based Operations.

AWK is a dividend challenger, having increased dividends yearly for the last 7 years. It offers a yield of 2.3% with a payout ratio of 56%. The current payout ratio is higher than last year’s 40% but still within its range since 2010. AWK’s dividend has increased at an annualized rate of 8.1% over the last 5 years.

P/E is high at 24.3, beating both the industry average of 16.1 and the S&P 500 average of 18.7. The P/ has always been higher than the S&P since 2010 and the gap this year is significantly higher than previous years. Estimated 5 year EPS growth is 8.1%; the highest in this roundup.

Black Hills Corporation (BKH)

With roots as far back as 1883, Black Hills Corporation (BKH) is based in South Dakota and operates electric and gas utilities in South Dakota and Wyoming, selling power throughout the American West. it also operates the largest surface coal mine in the US in Wyoming. BKH has a $2.4B market cap.

A Dividend Champion with a  44 year dividend growth history, BKH has a yield of 2.9% based on a quarterly dividend payment of $0.39 per share. The dividend has grown at an annualized rate of 1.9% with increases arriving each February. The Payout Ratio is 61.4%, which is quite a typical value over the last 10 years but the ratio has been quite volatile, exceeding 100% in 2005 and again in 2011 with no value available in 2008.

BKH’s P/E value is 21.1, higher than both the industry average of 17.7 and the S&P Average of 18.7. The stock has been trading with a P/E slightly higher than the S&P Average since 2011. Estimated EPS growth over the next 5 years is 7%.

Honorable mentions

Consolidated Edison (ED)

ED has one of the higher yields in the Dividend Champions, with a long dividend growth history of 40 years. I didn’t consider it further however as it has a low 5 year dividend growth of 1%.

What to buy?

Looking at all 8 companies, my criteria of requiring a 5 year dividend growth history eliminates GXP from the start.

Of the remaining 7 companies, two fail to meet my criteria for 3% dividend growth, so BKH and CTWS are eliminated.

VPU, AWR, LNT, AWK and NEE all match my minimum criteria.
Despite a great growth prospect, AWK is penalized by a low yield and a short growth history plus an unstable dividend payment schedule.

With its amazing 60 year dividend growth history, AWR also loses some points due to a lower yield and lower future growth estimates compared to the others.

Although LNT’s dividend history is shorter than the three 40+ year champions in this review, its 11 year history is still respectable. Its higher yield and reasonable growth estimates make it an attractive candidate. Likewise NEE also scores well, losing out to LNT due to lower dividend yield.

It’s not really fair to compare an ETF with a stock, but LNT does pretty well and loses out to VPU because of a smaller market-cap.

Here is the comparison visually.

Yield #Yr DivGr5 EstGr5 Projected Stable Credit Score Status
VPU 3.1 5 4.9 4.9 19 5 A+ 41 Buy
LNT 3.2 11 6.3 4.9 19 5 A- 38 Buy
NEE 2.8 20 8.9 6.6 17 5 B+ 37 Buy
AWR 2.5 60 10.5 2.0 13 3 A- 35 Buy
AWK 2.3 7 8.1 8.1 15 2 B+ 26 Buy
CTWS 3.0 44 2.3 5.0 18 5 A- 0 Hold
BKH 2.9 11 1.9 7.0 18 5 B+ 0 Hold
GXP 3.6 4 2.4 5.0 22 5 B+ 0 Hold

My purchases this week

This week I decided to split my $300 Sharebuilder purchase between LNT and AWR. LNT already comprises about 4.3% of my projected dividend income so I wanted to diversify more. I was quite tempted by NEE but I think it’s a little expensive currently. AWR was the remaining choice of the stocks this week – it has slow dividend growth but is also a fairly conservative stock.

Total purchases this week are:

  • LNT ($150) – 2.3263 shares @ $64.48
  • AWR ($150) – 4.3605 shares @ $34.40

These investments should increase my yearly dividend income by about $8.

Full disclosure: I am long AWR, GXP, VPU & LNT.

 

Quote of the day

You can’t cross the sea merely by standing and staring at the water. Don’t let yourself indulge in vain wishes.

0 thoughts on “Utilities dividend stocks – December Purchase #2”

  1. Thanks for sharing….Utilities are the smallest section in my portfolio as well. I own an ETF and am looking to initiate a position in some water utilities. Curious that you havent included another dividend challenger – WTR. I think its has a decent yield and decent dgr. Still a high PE imo.

    R2R

    1. Hi R2R,

      Yes that’s a good point and thanks for mentioning WTR which has a 23 year growth history. It wasn’t excluded for any specific reason other than that there are so many dividend champions in this sector that I can’t mention them all! NEE and BKH piqued my interest of late so got added to my watchlist recently.

      Best wishes,
      -DL

  2. Hi,

    Mi knowledge of the american market is quite limited. Apart from the water providers you enumerate in the post, is there any other american water company more recommendable?

    Thanks a lot,
    CZD

    1. Hi CZD,

      The two other main utilities in the US are

      Aqua America (WTR) as mentioned above by Roadmap2Retire. This is the 2nd largest utility in the US after AWK. WTR also offers a DRIP program with a 5% price discount.

      California Water Service (CWT) ) is the 4th largest after AWR, with a > 40 year dividend growth history. It didn’t make my stock screener because of negative EPS growth this year.

      The dividend yields for the top 4 companies are all around 2.4% at the moment. None are very cheap at current prices though.

      The following are all smaller companies (around $200-$300M in size) but have higher dividend yields of 3% or higher:

      Middlesex Water MSEX is also on my watchlist but I didn’t write about them in my post this week as their 5-year dividend growth was only 1.3%. I originally looked at them as they had low debt levels.

      Artesian Resources ARTNA and York Water Company YORW but I don’t know anything about those two.

      Do you own any European Water utilities?

      Best wishes,
      -DL

      1. Hello, DL,

        Water utilities are not very popular among European or Spanish dividend investors. This is the reason of my question about the most interesting ones in your market.

        Thanks a lot,
        CZD.

    1. Hi DFG,
      Yes my thoughts exactly. They are low growth but good for income.

      For the really long term I suppose it could be less risk to invest in areas less likely for a major hurricane or earthquake – California and Florida are perhaps more risky?. I should look up the effect that hurricane Sandy had on the NY utilities for that matter. But disasters can happen anywhere in any industry – the company I work at was flooded earlier this year from a heavy storm causing $100+ million damages – which is why diversification is important.

      Best wishes,
      -DL

  3. Hey man. To follow up on what someone mentioned about European utility stocks, how about some from the motherand, eh? Severn Trent (water which I grew up drinking) and National Grid (power supply network)

    1. Hey M,
      Message received loud and clear 🙂 I’ll be sure to fly the flag on my next sector roundup! I grew up with Southern Water which is a private company apparently, British Gas and the National Grid.
      Did the floods earlier this year affect the water utilities in any way, e.g. cause a lot of expenses etc?
      Cheers,
      -DL

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